Most of us are aware of the business scandals and failures in recent years and how occupational fraud and abuse were common themes to these failures. At any given time, you can review case studies and allegations of fraudulent activity on government websites, such as the SEC and IRS.
According to the 2006 Report to the Nation on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners, “Occupational Fraud” can be defined as:
“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
Many business owners are quick to dismiss the idea that their business could be a victim of occupational fraud. They feel that they are too small or that their employees would never commit fraud, or at least to the extent of those cases portrayed in the media.
Based on a fraud survey in the 2006 Report to the Nation, small businesses (less than 100 employees) suffered a median loss of $190,000. Medium size businesses (100–999 employees) showed a median loss of $179,000 and larger businesses (1,000–9,999 employees) showed a median loss of $120,000. These findings indicate that the larger losses are associated with smaller companies. Although these are meaningful numbers, most fraud goes undetected or the period of the fraudulent activity is unknown. This makes it nearly impossible to quantify the actual costs of fraud on businesses.
The Fraud Triangle includes three common elements that are often present in fraud schemes:
Opportunity: The most common element of the fraud triangle is the opportunity to commit fraud. An organization may not have sufficient controls or segregation of duties which can result in an opportunity to commit fraud. For instance, allowing the same employee to handle cash receipts, record accounts receivable, and process bank deposits provides greater opportunity to commit fraud than if these duties were segregated.
Pressure: Many fraud perpetrators feel that they are under some type of pressure which pushes them to commit fraud. These pressures can be business related, such as poor business performance or specific financial goals set by a particular department. Personal pressures can include the desire to maintain a certain lifestyle by owning expensive property or taking luxurious vacations.
Rationalization: A person often develops a justification as to why it is okay to commit fraud and will rationalize their fraudulent behavior. For instance, an employee may feel that a company owes them or that they deserve to be paid more. Other common rationalizations are that a company can afford losses or that everyone does it.
Misappropriation of Assets involves the theft or abuse of an organization’s assets. Misappropriation of assets can be accomplished through a variety of methods including, but not limited to, embezzlement, theft of inventory, or causing an entity to pay a third party for goods or services not received.
Major Categories of Misappropriation of Assets
1. Cash Fraud
2. Accounts Receivable Fraud
3. Disbursements Fraud
4. Payroll Fraud
5. Inventory Fraud
6. Employee Expenses
7. Investments and Other Assets
Financial Statement Fraud can be described as the misrepresentation of the financial condition of an organization through the deliberate or intentional misstatement or omission of dollar amounts or disclosures in the financial statements. The purpose of the misstatement is to deceive the users of the financial statements.
Major Categories of Financial Statement Fraud
1. Overstating or Understating Revenue
2. Overstating Inventory
3. Improper Disclosure of Related Parties
4. Misrepresenting Property Assets
5. Equity, Liabilities, and Other Assets
Fraud is all too common in the workplace. Companies can develop or improve existing internal control procedures to mitigate the opportunity for employees to commit fraud. If you suspect that your client is a victim of a scheme to defraud them of goods, services, or cash, please feel free to contact UHY Advisors FLVS, Inc. to discuss the situation.
Frank E. Rudewicz serves as Principal and Counsel of Marcum LLP and heads the Forensic, Investigative and Valuation Advisory practice for the New England area. He has more than 26 years experience conducting domestic and international investigations for anti-trust/anti-competitive issues, harassment, fraud, ethics and other employment related conduct.